Tom Toomey, CEO of real estate investment firm UDR Inc., is betting the best rental deal in Manhattan is owning the whole building.

The nation’s third-largest apartment real estate investment trust bought a five-tower apartment complex on Columbus Avenue between West 97th and 100th streets for about $630 million last month, with rents from $2,500 for a studio or one-bedroom apartment to more than $10,000 a month for a penthouse suite. It’s Mr. Toomey’s fifth purchase in Manhattan in the past year as rents soar and financing difficulties make it harder for individuals to buy.

“Financing and underwriting are much tighter,” said Mr. Toomey. With purchases requiring larger down payments, “people are going to stay renters for a long time,” said Mr. Toomey, who’s based in Highlands Ranch, Colo.

Strict lending standards for so-called jumbo mortgages have contributed to declining home buying across the U.S. by even the most creditworthy borrowers as issuance of the loans has dropped 68% since 2007. Nowhere is that more evident than in Manhattan, where the median price of a two-bedroom apartment is about $1.2 million, almost twice the limit backed by government- supported mortgage companies Fannie Mae and Freddie Mac.

Manhattan rents rose 9.5% last quarter to an average $3,121, Miller Samuel Inc. and Prudential Douglas Elliman Real Estate said in a report last month. That’s about three times the rate for the 44 largest apartment markets in the U.S., according to Marcus & Millichap, a real estate brokerage firm. Manhattan rental apartment vacancy rates fell to a four-year low of 0.96% last year, down from 1.2% a year earlier and 1.9% in 2009, according to brokerage Citi Habitats. Vacancy bottomed in 2006 at 0.76%.

“The key to the strength of the rental market is tightness of credit,” said Jonathan Miller, president of appraiser Miller Samuel. “It takes quadruple-A bizarre credit requirements to get approved.”

Jumbo loans exceed limits set for government-controlled mortgage companies by congress. For New York that’s $625,500.

Wall Street’s pay practices are also making it harder to buy, as financial firms increasingly pay bonuses in stock and deferred cash, said Alan Johnson, managing director of compensation consultant Johnson Associates Inc.

Morgan Stanley, Credit Suisse Group AG and Citigroup Inc. have all reduced senior investment bankers’ pay for last year as revenue slows. Morgan Stanley is capping immediate cash bonuses at $125,000, people with knowledge of the move said last month.

“It’s not a great sign for the financial sector contributing to purchasing apartments because there’s no sense of urgency to buy,” said Mr. Johnson. “Rentals are a much shorter commitment.”

Renters outnumber homeowners in the country’s largest cities including New York, Los Angeles and Chicago. More than 77% of Manhattan’s occupied units were rented in the decade ended 2010, compared with nearly 23 that were owned, data from the Census Bureau showed.

Nationally, the home ownership rate fell 1.1% to 65.1% from 2000 to 2010, the largest decrease since the Great Depression, according to the U.S. Census Bureau.

Low vacancy rates and rents that are likely to continue climbing this year have made apartments the “darling” of commercial real estate, according to Ryan Severino, economist at research firm Reis Inc.

The Bloomberg REIT Apartment Index of 16 publicly traded landlords returned 10% in the past year, including reinvested dividends, compared with returns of 6.8% for the Bloomberg REIT Index and 5.2% for the Standard & Poor’s 500 Index. Equity Residential, the largest U.S. apartment REIT, returned 11.2% in the past year, according to data compiled by Bloomberg, and UDR gained 10.8%.

Mr. Toomey said in August that the REIT planned to invest as much as $1.8 billion in Manhattan apartment buildings. Its most recent purchase, about 700 apartment units at Columbus Square on the Upper West Side, was a joint venture with MetLife Inc., the biggest U.S. life insurer.

They partly funded the purchase with $302.3 million of 10- year fixed- and floating-rate debt from Fannie Mae, the government-supported mortgage company, UDR said in a statement last month. The loans pay 3.8% interest.

That compares with a rate of 4.85% for a 30-year jumbo mortgage to an individual in New York and 4.73% nationally, according to Bankrate.com data. For conforming Freddie Mac loans, rates are 3.95%, after falling to 3.87% this month, the lowest in records dating to 1971.

Lenders have been wary to issue mortgages for non- conforming loans including jumbos since the housing market started falling in 2006 and losses on mortgage securities propelled the nation into the worst financial crisis since the Great Depression.

For Fannie Mae and Freddie Mac, the conforming limit is $625,500 in high-priced markets such as New York, San Francisco and the Florida Keys, compared with $417,000 for most of the rest of the country. The Federal Housing Administration, a government agency with the goal of expanding ownership for “underserved” communities, according to its website, will insure loans up to $729,750 in New York.

Banks and mortgage lenders issued $110 billion in jumbo loans last year, up 5.8% from 2010, according to Guy Cecala, publisher of Inside Mortgage Finance. The market has contracted from $348 billion in 2007 after peaking in 2003 at $650 billion.

Mortgage origination overall was down 17% year-over-year to $1.35 trillion, the lowest in over a decade, according to Mr. Cecala.

Lenders and bankers, no longer able to package jumbo loans and sell them to investors, are required to have enough capital to carry non-conforming debt on their books until maturity.

“Some don’t have the ability to keep it on their balance sheets,” said Monte Redman, president of bank holding company Astoria Financial Corp.

FHA loans are also harder to get in Manhattan, and aren’t available at all for co-op apartments, because borrowers purchase shares in the building’s management company instead of buying the property itself. The FHA does limited lending for condominiums, units individually grouped into a cluster. It insured 107 mortgages for condos in Manhattan last year, compared with 90 in 2010 and 42 in 2009, the FHA said.

Manhattan co-op and condominium sales totaled 2,011 in the fourth quarter, 12.4% less a year earlier, according to Miller Samuel and Prudential.

Non-conforming loans nationally accounted for nearly 2% of all purchase applications last year, up 33% relative to 2010, according to the Mortgage Bankers Association’s monthly profile of state and national mortgage activity.
Those loans have tougher standards such as high interest rates and down payments ranging from 25% to 40%, according to Mike Fratantoni, vice president of research for the Mortgage Bankers Association.

“They’re only available to the best credit borrowers,” Mr. Fratantoni said.

Financing a purchase with loans above government limits won’t get easier until the secondary market grows an appetite for jumbo loans, according to Mr. Miller of Miller Samuel.

The secondary market comprises mortgage bankers, savings and loan associations and large private investment institutions that buy mortgages from primary lenders or investors.